Non-Compliance: Non-Compliant Business Repercussions

Gabrielle Sinacola | Mar 25, 2024

Non-Compliance: Non-Compliant Business Repercussions

Compliance is one of the most important matters for businesses to tend to. Non-compliance can spell the end for a business if it cannot rectify the situation or if fines take a heavy financial toll.

There’s a lot to track, but thankfully, Mosey is here to help. Here’s what businesses should know about maintaining compliance and the potential repercussions for non-compliance.

What Does Compliance Mean in Business?

Every business must adhere to federal, state, and local business regulations. These regulations allow a business to operate within the boundaries of the law. If a business doesn’t comply with these requirements, the business can face repercussions.

The repercussions a business will face largely depend on the non-compliance issue. Some non-compliance issues, especially if believed to have been performed deliberately, can be considered criminal. Repercussions for non-compliance issues that aren’t believed to be deliberate or performed for illegal purposes usually involve civil penalties like fines.

Businesses can sometimes be forced to cease operations for non-compliance issues. Orders to stop conducting business are most common in cases where an issue of non-compliance can significantly impact the safety of employees or the public.

What Is Business Non-Compliance?

Non-compliance means a business failed to meet or fulfill legally necessary business structure or industry requirements. Some industries are regulated much more thoroughly than others, usually due to their management of people’s money, health, or safety.

Compliance issues often boil down to tax, registration, and labor laws for most businesses. Failing to meet legal requirements in these areas is often cited as non-compliance, which can significantly complicate an entity’s ability to conduct business lawfully.

What Types of Businesses Face the Most Compliance Requirements?

Financial professionals (accountants, banks), transportation (private and commercial airlines), all areas of medical care or health care, construction and architecture, and the energy sector (like nuclear energy) are heavily regulated industries.

Businesses that prepare or serve food are regulated according to special sanitation codes and protocols to protect the health of those who consume it. Businesses like barber shops, tattoo shops, and salons are regulated to protect the safety of customers who may be exposed to pathogens.

Businesses like clothing retail stores or tourist souvenir shops will face a few rules and regulations because they’re considered low-risk businesses. There’s no foreseeable risk to selling someone a nice blouse or a souvenir t-shirt.

What Should You Know About Non-Compliance With New Rules?

Rules and regulations that impact businesses change all the time. Changes are almost never immediately effective. They may be implemented slowly in several phases or announced several years ahead, giving businesses time to prepare for upcoming requirements.

Staying abreast with rules and regulations that can impact your industry is important. You’ll have a significant heads-up if things are going to change, and you’ll likely have ample time to prepare for compliance. The best time to become compliant is when a relevant act or regulation is passed, even if it hasn’t yet been enacted.

Mosey keeps track of upcoming legislation so you don’t have to. Manage when new legislation is announced and follow when it will become active automatically within our business compliance management platform.

What Are Common Compliance Issues for Sole Proprietorships and Partnership Structures?

Sole proprietorships and partnerships are designed to allow a person or multiple people to act as a corporation. For tax purposes, these structures are essentially considered people. Tax laws and requirements for individuals differ from those for corporations, so most sole proprietorships and partnerships won’t have to abide by the majority of corporate compliance requirements.

Sole proprietorships and partnerships deal with many legal and registration requirements when starting and maintaining their businesses. These requirements include filing for permits, properly filing taxes, and collecting sales tax when applicable.

What Are Common Compliance Issues for Limited Liability Companies (LLC) and S Corporations?

Limited liability companies and S corporations often face the same compliance requirements. The only functional difference between these two entity types is how they file their taxes.

S Corporations can choose for members to divide corporate income between themselves and report it on their individual tax returns, while an LLC will typically file corporate taxes.

These are the common compliance issues these companies face:

  • Completing requirements for Articles of Organization and filing the proper paperwork with state business authorities

  • Regularly filing mandatory reports, like annual reports

  • Completing and filing accurate tax forms by the required deadline

  • Obtaining a sales tax permit, collecting sales tax, and remitting sales tax to the state (when required)

  • Maintain all up-to-date licenses and permits

  • Maintain an active insurance policy when required by law

  • Abide by labor laws and safety requirements for employees

Compliance issues vary from state to state. You may need to be aware of city or county-specific compliance issues. Always check your local laws for specialized requirements that may impact your business.

What Are Common Compliance Issues for C Corporations?

C corporations are completely divorced from their owners, operators, and employees as tax entities. The level of privacy and security a C corp provides comes at a price, and that price is significantly more compliance requirements.

  • Completing requirements for articles of organization and filing the proper paperwork with state business authorities

  • Regularly filing mandatory reports, like annual reports

  • Completing and filing accurate tax forms by the required deadline

  • Obtaining a sales tax permit, collecting sales tax, and remitting sales tax to the state (when required)

  • Maintain all up-to-date licenses and permits

  • Maintain an active insurance policy when required by law

  • Abide by labor laws and safety requirements for employees

  • Fulfill transparency requirements and file reports with the United States Treasury

  • Appoint a board of directors and hold regular board meetings

  • Manage the purchase, sale, and transfer of company stock

  • Keep business finances separate from personal finances

  • Write and uphold corporate bylaws

  • Officialize all significant changes to business ownership, board members, structure, or bylaws by filing Articles of Amendment when necessary

C Corporations are usually the largest in size. Corporations that employ many people and generate a substantial profit are subject to the greatest compliance requirements.

What Can Happen When a Business Faces Non-Compliance Repercussions?

Non-compliance repercussions vary significantly depending on the type of non-compliance. Some types of non-compliance may be considered criminal if actions were taken deliberately in an attempt to break a law knowingly.

Tax Consequences

Tax consequences like penalties and audits are some of the most common repercussions businesses face for non-compliance. Abiding by tax rules and properly filing tax paperwork is one of the most important things a business needs to do.

A Halt of Business

Your business may be ordered to stop operating if you’ve been cited for non-compliance. A stoppage of operation can significantly limit cash flow while damaging your relationship with your employees and customers. It can be difficult for a business to recover from a forced pause.

Piercing the Corporate Veil

Corporations are designed to place a protective barrier between a business and the individuals who own the business. This protective separation is called a corporate veil.

In cases where noncompliance becomes a matter to be considered in court, it can be possible to remove the separation between a corporation and its key players. This is called piercing the corporate veil.

Piercing the corporate veil allows the state government, the federal government, or plaintiffs in a lawsuit to hold business owners civilly or criminally liable for their behavior by eliminating the protective barrier of the corporation.

Bad Press

Non-compliance can be scandalous to a corporation’s reputation if word gets around in a small town or if the instance of non-compliance makes the news. This can damage public opinion of your business or brand by making you appear disorganized or untrustworthy.

People who find your business untrustworthy may decide to take it elsewhere. It can be difficult to overcome a negative public relations scenario, and some businesses never fully recover.

Criminal Penalties

Criminal penalties for non-compliance are exceptionally rare, but they’re still possible. Criminal penalties are only enforced if non-compliance was part of an attempt to commit a crime, like tax fraud or deliberately exploiting migrant workers. Corporation owners are generally only sentenced to incarceration if it’s clear that they were aware they were committing a crime.

Maintaining Compliance with Mosey

Compliance is a lifelong process. Your business needs to adhere to rules and regulations in everything you do, and Mosey makes it easy to keep track of compliance issues with our platform and automated compliance solutions.

Mosey works in the background to manage your compliance while you’re focused on running daily operations. Start managing compliance before it becomes an issue and avoid the risk of non-compliance altogether. Schedule a demo with Mosey to learn how we can keep your business on the right track.

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